The bidding guidelines for grid-connected solar photovoltaic (PV) projects in the country may soon be amended to give bidders a way to nullify the effects of a potential safeguard duty.

A report by the Press Trust of India (PTI) quoted the Minister for Power R.K. Singh as saying, “The government will ensure that the rules are not implemented retrospectively. The government will amend the bidding rules to allow the pass through of any safeguard duty hike.”

“With the pass through of any hike in duties, solar power developers will be allowed to increase the tariffs based on which they have bagged the projects, so as to recover the extra cost. The duty structure prevailing on the day of bid shall be implemented. Any change in taxes and duties would be passed through. Current bidding documentation provides for passing through taxes only. We would provide for the passing through of taxes and duties,” added Singh.

Singh gave assurance that the planned amendment to the bidding rules could be carried out by his approval alone and would not require parliamentary approval. He said an inter-ministerial committee headed by the commerce secretary will finalize the recommendation on the proposal by the Directorate General of Safeguards by next week.

When contacted, an executive at one of India’s largest private solar independent power producers (IPP) said, “This is a huge relief. If such a clause is provided in the PPA or RfS or NIT issued by implementing agencies, it will give us (developers) an assurance that if prices spike up, the government has provided us a way to get back the extra cost incurred.”

“Even after saying that, I would like to add that the government has to carefully monitor such developments and should be aware of how these things are being implemented. It should not become a case where the developers bid at low tariffs knowing there is a way of redressal, but when redressal is required it does not arrive on time. The government must put a check on delays and other issues of the system which may lead to trouble for the developers,” the executive added.

Another executive at an Indian power conglomerate was more upbeat about Singh’s announcement, saying, “It is a welcome move and will provide relief. It will also keep solar prices/tariffs in check. This move will free the sector from the shackles of uncertainty. The Minister of Power is following in the footsteps of our Honorable Prime Minister, making strong decisions. The safeguard duty is good for domestic manufacturing, but bad for developers. The Power Minister here has found a middle path. He said that even if a duty is levied, there will be provisions that the duty doesn’t affect the profitability of the IPP.”

Background

The controversy surrounding the safeguard duty started in December 2017, when the Indian Solar Manufacturers Association (ISMA) filed a petition with the Directorate General of Safeguards Customs and Central Excise requesting that a duty be imposed on solar cells imported from China, Malaysia, Singapore, and Taiwan.

In a preliminary finding issued in January, the Directorate General of Safeguards Customs and Central Excise appeared to side with the petitioners by recommending that a 70 percent safeguard duty be imposed on solar cells imported from China and Malaysia for 200 days.

The case is now being considered by the Madras High Court. The court placed a temporary stay on the duty recommendation on January 22, 2018 after hearing a petition filed by project developer Shapoorji Pallonji that asked it to intervene in the matter.

But with the matter still unresolved, the temporary stay has done little to alleviate project developer anxiety about the duty proposal. In February 2018, more than 2 GW of planned solar tenders were postponed across three Indian states after bidders were deterred by the ongoing uncertainty about duties on critical project components. The ambiguity about the safeguard duty and other potential duties is making it difficult for developers to forecast project costs and make viable bids.

Singh’s comments that the cost of the proposed safeguard duty could be passed through come at a time when a parliamentary panel is already raising concerns about the proposal. The panel found that there are no valid grounds for imposing a safeguard duty and that it would adversely affect the viability of existing projects and dampen investor sentiment.

“Official approval of these proposed amendments to the PPA would be a significant positive development for the Indian solar industry and they could bring much needed certainty to the markets and calm the nerves of investors,” said Raj Prabhu, CEO of Mercom Capital Group. “The minister has made a similar statement in the past, but the industry is desperately waiting for an official order which will get activity in the sector moving again. The industry is also concerned about the details and execution, everybody knows what happened with GST and customs duty,” added Prabhu.

Parliamentary Committee Recommendation

The parliamentary standing committee on energy has recommended exemption of solar cells and modules from custom and safeguard duty. In a report, the parliamentary panel said, “The Committee has been informed that Custom Duty on solar cells and modules has been levied at the rate of 7.5 percent. Further, a Safeguard Duty to the tune of 70 percent has been recommended. The Committee feels that because of the imposition of Safeguard and Custom Duty, project developers will suffer. Such a duty will result in steep rise in input cost, affecting the viability of existing projects and dampening investors’ sentiments. In the opinion of the Committee, there are no valid grounds to take such emergency measures which having the potential to cripple the entire solar sector.”

Another executive working with a prominent renewable IPP said, “Let’s see when implementation begins, and how it is done. A few days ago, a parliamentary panel suggested that the safeguard duty should not be levied, and measures must be taken to protect the developers and now the Power Minister is saying that clause will be put in to allow for the passing through of additional charges incurred if safeguard duty is levied. It’s all good to hear it, motivational words, but where is the official order?”

“As he said he doesn’t need parliamentary approval for this, why hasn’t the Ministry of Power yet issued any order? The motive is there, but the government’s pace of action is slow. Right now, auctions are being stalled, tenders are being postponed, if an official order comes out we (developers) can participate easily in auctions as we will know what all to factor in. The MNRE issued a tender trajectory, to fulfill that tender trajectory and the yearly targets, we need quick action, if Mr. Singh thinks this is the right thing to do and it is in his power to act, he must be swift,” added the executive.

Speaking to Mercom, an executive at a major project developer which is also involved in solar component manufacturing, said, “The government has to decide how to balance solar manufacturing and solar project development. For the sector to grow they have to go hand in hand. But, a sudden safeguard duty imposition is not the way. The market should be open for forces to decide how the market grows. A safeguard duty of 70 percent is just acting impulsively.”

“The new comments by the Power Minister show that the government has been working to chart a path of development where no one is negatively affected. Whether a safeguard duty is required or how much of it is required is up to the head honchos to decide and that may take time. Mr. Singh’s comments will help in removing some of the uncertainty that has been affecting solar in India for some time now. If developers can adjust their prices, it’s all well and good,” added the executive.

Government officials declined to comment on the matter, saying that unless they receive further communication on the issue, they are duty-bound to not comment on the development.

Our Take

“The proposed safeguard duty would cause project costs to become more expensive than coal. If you look back, DISCOMs began procuring more solar as it became cheaper, when tariffs fell below three rupees,” said Raj Prabhu, CEO and co-founder of Mercom Capital Group. “DISCOMs are not in a financial position to afford higher solar tariffs – this will only make coal power look attractive again. In the end, everybody is for supporting domestic manufacturers, but it must be done in a way that does not crash the market and Prime Minister Modi’s goal of achieving 100 GW goal by 2022 can still be achieved,” added Prabhu.

Concerns over high tariffs have already prompted DISCOMs in Jharkhand, Uttar Pradesh, and Tamil Nadu to renegotiate PPAs.

In a recent analysis, Mercom reported that the cost of modules makes up roughly 55-60 percent of the total cost of solar projects. As such, if the imposition of a safeguard duty raised module prices by 70 percent, depending on the tariff level imposed, project developers as well as engineering, procurement, and construction (EPC) contractors would have to increase their tariffs accordingly. These higher costs would ultimately have to be borne by the DISCOMs.

Image credit: Office of R.K. Singh via Twitter